Economics

The monopoly that wasn't

IT'S aufully counterintuitive, but Slate's Taylor Clark says the evidence is clear--the opening of a new Starbucks coffee shop may not harm existing, nearby coffee houses. Quite the contrary, it seems; business for coffee sellers may improve after Starbucks moves in. How is this possible? Mr Clark writes:

Each new Starbucks store created a local buzz, drawing new converts to the latte-drinking fold. When the lines at Starbucks grew beyond the point of reason, these converts started venturing out—and, Look! There was another coffeehouse right next-door! [Rival shop owner Herb] Hyman's new neighbor boosted his sales so much that he decided to turn the tactic around and start targeting Starbucks. "We bought a Chinese restaurant right next to one of their stores and converted it, and by God, it was doing $1 million a year right away," he said.

The story, then, is essentially one of demand creation. Others have made this point before (here's Felix Salmon, for instance) noting that Starbucks has brought gourmet coffee drinks and the relaxed coffee shop setting to mainstream America. But while Starbucks' role in national taste making is clearly important, it seems a bit of a stretch to argue that this process continues at a local level, as if drinkers in a neighbourhood receiving a new store have never been exposed to gourmet coffee previously (at any of the chain's 15,000 other locations). In all likelihood, some additional factors are at work.

One important thing to note is that just because a new Starbucks hasn't shut down existing businesses doesn't mean that it isn't negatively impacting "mom and pop" coffee operations. According to Mr Clark, the number of independent coffee establishments grew 40 percent between 2000 and 2005, while the number of Starbucks locations tripled. Were Starbucks not expanding so aggresively, then a greater share of the increasing coffee shop market would be occupied by non-Starbucks sellers. Independent shop market share, in other words, is falling.

Like all national chains, Starbucks no doubt maintains a sophisticated system for targeting areas of high market potential. A new Starbucks in the neighbourhood can probably be taken as evidence of improvement in local demographic and economic statistics, of the sort that would also benefit existing businesses. Starbucks isn't, then, the cause of better business performance, but a correlate of a stronger neighbourhood, which boosts retail generally.

And as The American Prospect's Dana Goldstein points out, one cannot ignore a crucial factor in the growth of coffee shop businesses: wireless internet. While Starbucks is tied into a pay-for-access relationship with T-Mobile, many local coffee houses offer internet gratis. Starbucks omnipresence or no, students and workers seeking a few hours of peace, quiet, and java should prefer the convenience and value of the free internet options. If you're an internetless coffeemonger threatened by an invading Starbucks, however, the competitive outlook may not be so grande.